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Non-Compete, Non-Solicitation and Non-Disclosure Agreements



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  • 1. IDAHO EMPLOYMENT LAW SEMINAR Non-Compete, Non-Solicitation and Non-Disclosure Agreements Derek Langton Dylan A. Eaton October 17, 2013 Boise, Idaho
  • 2. Dilbert 2
  • 3. Non-Compete – Idaho Legal History  Effective July 1, 2008 - Idaho Legislature passes law regarding non-compete agreements  Idaho Code sections 44-2701 – 2704  Title of law: ―Agreements and Covenants Protection Legitimate Business Interests‖ 3
  • 4. In General, What is a Non-Compete Agreement?  Black’s Law Dictionary: ―A contractual provision … in which one agrees to refrain from conducting business similar to that of the other party.‖ 4
  • 5. Non-Compete Agreements in Idaho  Employers may use written agreements to protect their ―legitimate business interest‖ by precluding ―key‖ employees or independent contractors ―from engaging in employment or a line of business that is in direct competition with the employer’s business after termination of employment‖ 5
  • 6. “Key” Employee or Independent Contractor  Because of employer actions, such as investment of money and time …  Employee gains a high level of knowledge, influence, credibility, notoriety, etc. …  As a result, have the ability to harm or threaten an employer’s ―legitimate business interest‖ 6
  • 7. Employer’s “Legitimate Business Interests” Shall include, but not limited to:           Goodwill – good relationship with customers Technologies, intellectual property Business plans Business processes and methods of operation Customers Customer lists Customer contacts and referral sources Vendors and vendor contracts Financial and marketing information ―Trade secrets‖ 7
  • 8. Non-Compete Agreements Must be Reasonable  Reasonable ―duration‖  Reasonable ―geographical area‖  Reasonable ―type of employment or line of business‖  ―Must not impose a greater restraint than is reasonably necessary to protect the employer’s legitimate business interests‖ 8
  • 9. Presumption RE: “Duration”  18 months or less post-employment restriction is presumed reasonable  More than 18 months post-employment restriction: – Need ―consideration,‖ such as additional payment or benefits – Employment or continued employment not enough 9
  • 10. Presumption RE: Geographic Areas  Presumed to be reasonable if restricted to geographic area in which ―key‖ employee or independent contractor provided services or had a significant presence or influence 10
  • 11. Presumption RE: “Type of Employment or Line of Business”  Presumed to be reasonable if limited to ―type of employment or line of business conducted by the key employee or key independent contractor while working for the employer.‖ 11
  • 12. AMX International v. Battelle Energy  When hired, AMX employees sign noncompetition agreements that prohibit them from ―directly or indirectly working as or for an Active Client‖ for a period of 12 months following employment with AMX 12
  • 13. AMX International v. Battelle Energy  AMX defined ―Active Client‖ as ―a person, business or entity that AMX has sent an invoice to or concerning within the prior 24 months and who is listed in the invoice as the client or under the ―Bill to’‖ 13
  • 14. AMX International v. Battelle Energy  AMX non-compete agreement held not reasonable  Too broad as to clients with whom former employee is restricted from contacting  Failed to define the work its employees were prohibited from performing  Failed to restrict the geographic area 14
  • 15. Presumption RE: “Key” Employee or Independent Contractor  Presumed ―key‖ employee if among the highest paid 5% with employer  To rebut, employee or independent contractor must show that it has no ability to adversely affect the employer’s ―legitimate business interests‖ 15
  • 16. Idaho Trust Bank v. Ross  Discussion of current pending litigation in Kootenai County, Idaho 16
  • 17. Attorney Fees  ―Prevailing party‖ in a lawsuit where a central issue in a non-compete agreement likely is entitled to recover attorney fees under I.C. section 12-120(3).  Freiburger v. J-U-B Engineers, Inc., 141 Idaho 415, 111 P.3d 100 (2005). 17
  • 18. Trade Secrets Trade secrets or other confidential information are involved in virtually noncompete case 18
  • 19. Employer’s “Legitimate Business Interests” Shall include, but not limited to:  Goodwill – good relationship with customers  Technologies, intellectual property  Business plans  Business processes and methods of operation  Customers  Customer lists  Customer contacts and referral sources  Vendors and vendor contracts  Financial and marketing information  ―Trade secrets‖ 19
  • 20. Idaho Code section 48-801(5)  Information, including a formula, pattern, compilation, program, device, method, technique, or process, that: a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure of use; and b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 20
  • 21. Definition of “Trade Secret”  Information must have economic value from not being generally known  Not readily ascertainable by proper means  Subject of reasonable efforts to maintain secrecy 21
  • 22. Survey Results  National survey sponsored by Symantec – 59% of employees who quit or were laid off or terminated during 12 months prior to survey admitted to stealing company data – 67% admitted to using company’s confidential information to find new job – 53% stole data by downloading to CD or DVD – 42% stole data by connecting a thumb drive to computer 22
  • 23. Survey Results (cont’d)  38% transferred data to personal e-mail account  Numerous employees took hard copies of confidential information  24% indicated that they still had access to company’s computer network after leaving  Of that group, 20% still had network access more than a week after employment ended 23
  • 24. Protecting Your Company’s Trade Secrets  Identify your trade secrets  Keep the definition of ―Trade Secret‖ in mind when identifying confidential information—protect only that information which can truly hurt your company if someone else obtained it  Require employees to sign non-disclosure confidentiality agreements 24
  • 25. Steps to Protect Company Trade Secrets  Mark your trade secrets as ―Confidential‖ – Zemco Mfg. – Employed secret process for manufacturing shackels – Plaintiff’s employees received extensive training about the secrecy of the manufacturing process, – Signs were posted in the facility regarding the confidentiality of the process, and – Entry to the facility was restricted to authorized personnel – Court found that the company did not use ―reasonable methods‖ to protect its secrets because it did not mark the information as ―confidential‖ or have its customers or vendors sign confidentiality agreements. 25
  • 26. Steps to Protect Your Trade Secrets (cont’d)  Store hard copies of confidential documents in locked file cabinets, if feasible  Restrict access to the documents to the employees who need to use them as part of their jobs  Maintain good records regarding access to trade secrets  Train employees which information is confidential and their responsibility to keep that information confidential 26
  • 27. Protecting Electronically Stored Trade Secrets  Password protect electronically stored documents  Create an electronic ―paper trail‖ of who has access to electronically stored documents  Create an electronic record of who accesses the documents, at what point in time, and what actions were performed on the documents 27
  • 28. Create an Electronic Privacy Policy  The policy should state that all electronic data is the property of the company, and the employee has no right of privacy or ownership interest with respect to such data  The policy should also prohibit employees from modifying or deleting the company’s electronic data  Banks v. Mario Industries of Virginia, Inc., 650 S.E.2d 687 (Va. 2007). The company recovered damaging documents that detailed the employee’s theft of trade secrets, including a memo to his attorney, and was able to use the documents against him at trial due to the fact it had a well-crafted privacy policy in place. 28
  • 29. Backup Electronic Information When An Employee Leaves the Company  Create a mirror image of the employee’s computer hard drive(s)  Make backup copies of server tapes, if necessary  Create documents showing a chain of custody and control 29
  • 30. Protecting Trade Secrets that an Employee Knows from Memory  Some courts will protect a company’s trade secrets even if a former employee knows them from memory  Al Minor & Assocs. v. Martin, 2008 OH 292 – Former employee had worked for an actuarial firm that implemented and managed pension plans  The Ohio Supreme Court upheld a decision awarding damages against the former employee based on his memorization and use of his former employer’s customer list 30
  • 31. Inevitable Disclosure Doctrine  No Idaho appellate court precedent  Generally, doctrine has been on decline throughout country  But it’s not dead yet 31
  • 32. National Labor Relations Act Recent decisions by the NLRB raise concerns for employers, even for nonunionized companies, regarding confidentiality or non-disclosure provisions in employment agreements, e.g., Quicken Loans, Inc. (ALJ for NLRB ruled that confidentiality and non-disparagement provisions in employment agreements violated NLRA) 32
  • 33. Thank You  Derek Langton direct: (801) 536.6704 email:  Dylan A. Eaton direct: (208) 562.4911 email: 33